S&P to Step Up CLO Manager Monitoring

Standard & Poor's will be supplementing its process for gathering information about the systems, personnel, and other resources available to managers of S&P-rated CLO deals.

The managers utilize these resources to monitor their deal portfolios as well as carry out other related key functions. During the current market turmoil, the agency believes it is appropriate to supplement its regular process of updating this information on an annual basis or when it rates a new deal.

As the first step in supplementing the process, the agency will soon send out a questionnaire to managers of S&P-rated CLO deals. The agency thinks that this questionnaire is relevant to CLO managers considering the current loan market dislocation, the increasing corporate defaults, and the growing stress on overcollateralization ratio tests because of a rise in the proportion of loans from 'CCC' rated obligors.

The rating agency's goal is to gather the most current information about CLO manager resources, staffing, and risk management systems so that the agency could update its assessment of their adequacy for purposes of managing within the structural constraints embedded in CLOs, and monitoring the creditworthiness of the loans within the CLOs.

At this point, the agency will mainly focus on gathering information relating to the managers' credit processes and infrastructure with the goal of identifying potential considerable risks or deficiencies.

Circumstances might have changed for many CLO shops recently, with some managers facing the prospect of their subordinated fees shutting down. This could lead to some managers decreasing staff or access to analytic models, or even completely dismantling of a management unit.

Furthermore, the rating said that understaffed analytical teams and a damaged infrastructure could potentially impact trading decisions, the quality of credit analysis, and the ability to successfully manage the underwriting process or maintain back-end servicing operations, according a realease from the agency.

This questionnaire is part of the rating agency's ongoing effort to increase transparency and clarity in the global CDO market, and is aimed at serving as an added source of information for S&P about the adequacy of the resources available to managers for purposes of meeting the numerous challenges they currently face.

The agency will factor the results of the questionnaire into our monitoring process for CLO transactions, and we intend to follow up more directly with managers if we identify potential issues or have questions.

The rating firm intends to send out these questionnaires periodically throughout the year.

If a manager fails to respond to these questionnaires, or offers incomplete information, S&P might look at withdrawing the ratings assigned to the manager's deals, it said in the release.

For the list of CLO managers to whom the rating firm will send questionnaires, refer to Standard & Poor's Rated CLO Transaction Collateral Managers, published last March 10, on RatingsDirect and standardandpoors.com.

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